As consolidation continues in the U.S. banking industry, there is a strong potential threat to the financial well being of members of a major U.S. commercial customer segment and their 30,000,000 employees. That group is comprised of some 1,600,000 U.S. businesses with sales of $500,000 to $50,000,000, many of which are rapidly growing and innovative and hold the key to our future economic success. This group of commercial banking customers also depends on close personal attention, customized and reliable credit services, and prompt responses to their credit needs—requirements that will not be the primary focus of our new trillion dollar bank holding companies.
These small to lower mid-market businesses are unlike very large companies, which have powerful leverage as well as alternate sources of funds in the capital markets. These businesses are also unlike very small (i.e. “mom and pop”) businesses and retail customers, which, by and large, are much less dependent on their banks, can move from bank to bank with relative ease, and utilize standard credit products.
When seeking a commercial credit relationship, most businesses in this group would welcome the opportunity to borrow from a local bank or financial institution over a larger bank or financial institution headquartered thousands of miles away. The officers and other employees in a local financial institution, such as an independent community bank or thrift with assets of less than $500,000,000, are likely to have a better understanding of a business within their community and the benefits of that business to local industry and to the community in general. A local financial institution can also be more responsive to the needs of the local business and has a greater interest in meeting those needs for the overall benefit of the community and its local industries. Moreover, when dealing with a local financial institution, a business is likely to enjoy preferred customer status and the attention of top management in that financial institution.
Despite the many advantages of banking with local financial institutions, however, businesses must be confident that the community bank or thrift can match the product, price and operational standards of the larger financial institutions as well as be able to contribute to their company's growth. The greatest impediment to using independent community banks and thrifts for obtaining commercial credit is their limited lending power or capability. No matter how much a growing company may want to keep its banking local, if it needs a $3,000,000 credit facility, and the local bank's legal or house lending limit is one million dollars, it has no choice but to consider a larger bank. Thus, larger banks have a distinct advantage lending to the larger and growing local companies due to the size of the credit products they can offer.
Previously there were enough regional banks with sufficient lending power to take care of local companies. However, deregulation in the banking industry has resulted in consolidation, which continues to deplete the ranks of large regional banks and results in the formation of major bank holding companies (BHCs) located a great distance from their customers. As a result of bank consolidation, an increasing number of U.S. businesses are forced to rely on these major BHCs headquartered more than one thousand miles from the business. To retain existing small business customers and to compete with major BHCs in attracting growing companies, community banks and thrifts must be able to offer credit products and services, which are competitive to those offered by the larger financial institutions.
Given the advantages of and preferences for banking with community banks and thrifts, effective competition with the major BHCs is possible only if the community banks and thrifts can offer competitive commercial credit services. If the community banks and thrifts have sufficient funds, they could use their comparative advantage to defend their existing commercial customer base from the major BHCs as well as offer an alternative source of commercial borrowing to the local business customers of the major BHCs, i.e., the lower mid-market companies having sales of $5,000,000 to $50,000,000, which have always been the exclusive domain of the larger banks. Given sufficient funds, the independent community banks and thrifts could offer competitive products at competitive prices, coupled with more responsive service and support.
Accordingly, a need exists for a computerized system and method of establishing a loan participation network (or community credit network) that will allow community banks, thrifts and other financial institutions to pool their resources and offer large commercial credit accommodations to small to mid-size businesses as a collective lending entity. Besides increasing their legal lending limits, the loan participation network will improve liquidity among member community banks by utilizing excess cash from participating liquid banks to support banks with a need for cash. The loan participation network will allow community banks to offer products and services competitive to the major BHCs while maintaining the benefits of local banking for the local businesses and the community in general.
Benefits to the community banks participating in such a loan participation network include: expanded service offerings and greater flexibility; improved ability to retain growing commercial customers; improved average credit quality through portfolio diversification and risk spreading; improved growth and return on assets and equity; increased competition in the financial services industry; optimized Community Reinvestment Act (CRA) compliance; and enhanced franchise value of community banks due to improved competitive position and greater market share.
The benefits to local businesses include: the opportunity to enjoy preferred customer status; more timely response to credit requests; superior lending understanding of borrowers business and needs; consistency of service and stability of lending personnel; depth of backup support from network members; protection from arbitrary loan policy decisions or changes from distant BHCs; increased competition in the credit marketplace and expanded choice of banks; and improved access to capital funds as well as enhanced stability and dependability of capital sources.
Benefits to the communities include: broader local bank involvement in the communities; defense from arbitrary policies of distant BHCs, which negatively effect local industries and enterprises; strengthened and more attractive local business climate; optimal allocation of community financial resources in local and neighboring markets; and greater stability in the local employment base.